The Promise of Shared Services

Executive Summary

Education spending constitutes up to half of many state budgets in the United States. In recent years, tighter state budgets, surging school enrollment in many districts (and falling in others), executive mandates, and court rulings have put increasing pressure on states and school districts to reduce education costs, especially for non-instructional services.

In most states at least 40 percent of every dollar spent on education never makes it into the classroom. Instead it is expended on business operations: transportation, human resources, food services, information technology, building maintenance, administration and other largely support functions. The often high costs of providing these services, and the inefficient way in which they are often provided, has caused more and more state political leaders to call for school district consolidation. The goal-to take advantage of economies of scale and reduce these costs-makes a lot of sense. Consolidation, though, can also have some serious downsides: it is politically unpopular, reduces local control, can negatively impact educational outcomes, and eventually can lead to even higher costs due to the dead-weight of bureaucracy. In short, consolidation may not be the most effective strategy to help districts direct more money into the classroom.

With large districts often generating high overhead and instructional spending, does this mean that small districts and small schools are the answer? From an education quality perspective, a strong case certainly can be made for smaller schools, which have been associated with higher SAT, ACT and National Assessment of Educational Progress scores. There is a major problem, however, with small school districts. According to a substantial body of research, they tend to have comparatively high non-instructional costs. The ten smallest school districts in California, for example, had average spending on “other services” 578 percent higher than the state average for all districts.

Fortunately, there’s another option, one that makes it possible to educate students like a small district and still have the economies of scale and buying power of a large district. How? By implementing shared services. Small districts can band together to share everything from transportation services to building gymnasiums, creating the purchasing power and economies of scale of medium-sized districts. Large districts can organize their individual schools into smaller clusters and still benefit by sharing services internally. Charter schools can purchase administrative services from school districts or other charter schools. Districts of all sizes can participate in agreements that improve the quality of their staff and internal capacities.

Sharing services is a technique that both the private and public sectors have employed for decades and has been growing rapidly in popularity in recent years due to its proven ability to reduce costs. Since the late 90’s, companies such as Ford, General Electric, Hewlett Packard, Pfizer and British Petroleum have all realized significant cost savings from shared services.

Shared services have also become commonplace in government. The U.S. Postal Service saves $25 million a year by using shared services for accounting. Work that had been performed by 1100 employees at 85 unique district offices has been consolidated and standardized, and is now being performed by only 350 employees at three Accounting Service Centers (ASCs). In New Jersey and Michigan, many municipal governments have engaged in shared services agreements for everything from purchasing to benefits administration.

School districts have also made use of productive shared service arrangements. For example, two school boards in Ontario, Canada joined together to share bus transportation services and audio-visual resources. By creating a single bus system, the two boards will save $8 million in administrative, capital, and fuel costs over three years. The boards’ shared AV library serves classrooms in both districts, saving $300,000 annually. Similarly, in the greater Lawrence area of Massachusetts, 10 school districts banded together to provide special education services. This sharing will save them approximately $13 million over the next two decades.

Yet across the country, school districts have barely scratched the surface in terms of tapping into the cost savings potential and other benefits from shared service arrangements. Shifting just a quarter of tax dollars spent by school districts throughout America on non-instructional operations to shared services, for example, could potentially yield savings in the range of $9 billion. To put this number in perspective, it is equivalent to 900 new schools or more than 150,000 additional school teachers.

States that desire to promote the greater use of shared services in local school districts have several levers they can pull, including budget pressure, financial incentives and technical assistance. The states of New York and New Jersey, for example, both provide financial incentives for school districts to engage in shared services. One New Jersey incentive program, the Regional Efficiency Aid Program, provides tax credits directly to homeowners as a way to publicly reward school districts and municipalities for sharing services. Meanwhile, Texas Gov. Rick Perry has taken a different tack, issuing an executive order mandating that school districts limit non-classroom spending to 35 percent of their total budgets. The order is expected to create strong momentum for more service sharing by Texas school districts.

Sharing services creates the economies of scale and consistency of process and results that come with more centralized models. It also allows districts to maintain the benefits of decentralized control, allowing individual administrators to retain oversight of curriculum, education, and other aspects of non-shared processes. By sharing processes that aren’t mission-critical while still retaining local control of the most important aspects of education, shared services can bring the best of big and small.

Attachments

Rob Wavra is a consultant in Deloitte's Federal Strategy and Operations practice, based in Washington, D.C. He serves U.S. government clients in a variety of engagements, with experience including process improvement, performance management, and e-Government. He was selected to be an Associate Fellow in the Deloitte Research Fellows program for 2004-2005.

Adrian Moore, Ph.D., is vice president of policy at Reason Foundation, a non-profit think tank advancing free minds and free markets. Moore leads Reason's policy implementation efforts and conducts his own research on topics such as privatization, government and regulatory reform, air quality, transportation and urban growth, prisons and utilities.